The importance of the outstanding Constitutional Court judgment on the Public Protector’s report on the ABSA/Bankorp affair

Introduction

The role of the current Public Protector, Advocate Busisiwe Mkhwebane, has become increasingly controversial, especially with regard to reports which she has issued recently concerning the current Minister of Public Enterprises, Pravin Gordhan. These reports relate to the so-called SARS rogue unit and the pension arrangements in respect of Ivan Pillay, a former SARS Deputy-Commissioner.

 The judgment by the Constitutional Court in the ABSA/Bankorp case (details on this case are set out below) is still awaited, after the Court hearing on 27 November 2018. Apart from important legal issues, the Court also has to rule on the question of whether the High Court was correct in ordering her to pay 15% of the costs out of her own pocket.

 We deal with the background below in some detail regarding the Public Protector’s report on the ABSA/Bankorp matter, as it is impossible to obtain an overall grasp of her role in that case without a comprehensive review of the facts.

The factual background to the ABSA/Bankorp case

 Over the period 1985 to 1991, the South African Reserve Bank granted a loan amounting to R1.5 billion to Bankorp, which had experienced financial difficulties in its banking operations. The South African Reserve Bank acted within the framework of its general duty to ensure confidence in the banking system, to protect depositors and to avoid contagion. The proceeds of the R1 billion were to be invested with the South African Reserve Bank or in Government Bonds and would earn 16% interest, but only 1% interest on the loan was to be paid to the South African Reserve Bank. This arrangement meant that Bankorp was able to benefit from an interest rate differential of 15%. The investment was ceded to the South African Reserve Bank as security.

 The annual interest amount of R225 million earned by Bankorp was to be available for five years, resulting in a total of R1.125bn. It was intended that these funds would be applied to the writing off of bad loans. After 5 years, the R1.5bn principal would therefore be repayable, but not the interest differential of R1.125bn. In 1992, ABSA Bank took over the assets and liabilities of Bankorp and ABSA Bank replaced Bankorp in the agreements with the South African Reserve Bank. The agreement terminated in 1995, with the principal of R1.5 billion being repaid.

 The South African Government subsequently entered into an agreement with a UK-based asset recovery agency (CIEX) in October 1997 to investigate and assist in recovering assets that had allegedly been misappropriated prior to 1994.

The findings of the Public Protector

The Public Protector found in a report of June 2017,¹ that the South African Government had failed to implement the CIEX report and to recover an amount of R1.125 billion from Bankorp/ABSA Bank. Her report found that the conduct of the South African Government and the South African Reserve Bank constituted improper conduct and maladministration. She therefore decided to refer the matter to the Special Investigating Unit in order to recover the misappropriated public funds from ABSA Bank. She also issued instructions for a change to the Constitution.

 Much attention had already been paid to this affair before the Public Protector chose to take it up again. A panel of experts had been appointed by the Governor of the Reserve Bank in 2000, with Judge Dennis Davis as chairperson (referred to below as “the Panel”). The Panel found that the financial assistance given by the South African Reserve bank in this case was seriously flawed and that, in using a simulated transaction, it meant that the Reserve Bank had acted outside its statutory powers. There was therefore no dispute between the Panel’s report and that of the Public Protector that the nature of the assistance provided was unlawful. However, it should be noted that it was just the particular kind of assistance rendered to Bankorp that was found to be unlawful by the Panel, and not other methods that may be used by the Reserve Bank to assist banks in distress.

 As far as appropriate remedial action is concerned, the Panel found that the price that ABSA had paid in its acquisition of Bankorp included the value of the Reserve Bank’s assistance, and that it was therefore not unjustly enriched. The beneficiaries of the assistance were therefore the selling shareholders (mainly Sanlam, as the majority shareholder). The following is taken from the Panel’s report:²

 The Reserve Bank’s assistance conferred benefits on Sanlam’s policy holders and pension fund beneficiaries and on the minority shareholders of Bankorp. That is contrary to public perception published in the media, and contrary to the conclusions of the Heath Special Investigative Unit. Those perceptions and conclusions have incorrectly asserted that major benefits were received by the shareholders of ABSA.

 The conclusion that the Reserve Bank acted ultra vires leads to a consideration of restitution. It is the view of the Panel that, in principle, restitution from the beneficiaries may be sought, but that it may well be difficult and extremely costly to achieve through litigation, because of the difficulty of determining the exact class of beneficiaries, apportioning the enrichment and the fact that duly appointed officials of the Reserve Bank made the key decisions.

The Panel is of the view that the difficulties pertaining to the quantification of the enrichment and the identity of the beneficiaries (e.g. as a mutual society at the time, much of the enrichment would have been enjoyed by Sanlam’s policy holders) render problematic the prosecution of an enrichment claim.

In her report, the Public Protector confirms being presented with ABSA’s argument that it had paid fair value when it acquired Bankorp (ie. including the assistance by the South African Reserve Bank), but states that this argument cannot be sustained since the Special Investigating Unit and the Panel established that the R1.125bn was an unlawful gift. That was the end of the matter as far as the Public Protector was concerned.

The issue here is who benefited and whether it is realistic to attempt to retrieve the funds from those recipients. The Panel dealt with this in some detail, but the Public Protector has simply avoided the issue, except to say that as the assistance was unlawful, therefore ABSA, having acquired Bankorp, has to pay. The legal issue at play here, i.e. that ABSA was not unlawfully enriched, has not been understood by her at all.

 Another aspect is the mandate of the Reserve Bank. The following is taken from the Public Protector’s report:

 5.3.23 It is evident that the status of the South African Reserve Bank as the lender to (sic) last resort has commercial benefits only in respect of the financial sector market. The benefit which involves vast amounts of public money does not improve the socio-economic conditions of ordinary citizens of the Republic but of a particular financial sector.

 5.3.24 Leading authors advocating and promoting the ideology of state banks and nationalisation of monetary currency believe that the notion of the lender of last resort’s status that is inherent to central banks internationally would cease to exist if governments take sole power in creating money through the establishment of state banks.

 5.3.25 It is this belief that once the state takes control of creating money and credit, numerous benefits aimed at alleviating economic ails (sic) of ordinary economically disadvantaged people may be achieved, unlike our current purely commercial transaction system which only seeks to improve a particular financial sector.

 5.3.26 The debate on nationalisation of monetary currency and creation of state banks is one that has found its way in to our democratic society and is a debate which must reach its conclusion by the people of South Africa.

 The whole debate on the issue of governments being empowered to print money is confined to these four paragraphs. The paragraphs offer no references as to what authority these propositions are based on and “leading authors” therefore remain anonymous. The persons whose names are mentioned in the report as having been consulted (we assume on economic issues, but it is not explicitly stated) are dealt with in more detail further below. The dilettantish way in which the money supply role of central banks is discussed, shows a staggering lack of understanding and analysis of what, at the best of times, is a very complicated subject.

The report then leads on to one of her other proposed remedial actions, which entails nothing less than a change to the Constitution. The report states, in peremptory fashion, that the Chairperson of the Portfolio Committee on Justice and Correctional Services “must initiate a process that will result in the amendment of Section 224 of the Constitution”, which “should thus read:”

 224 (1) The primary object of the South African Reserve Bank is to promote balanced and sustainable economic growth in the Republic, while ensuring that the socio-economic well-being of the citizens are (sic) protected.

(2) The South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, while ensuring that there must be regular consultation between the Bank and Parliament to achieve meaningful socio-economic transformation.

 Legal action taken following the Public Protector’s report

 The SARB then approached the High Court on an urgent basis for an order to set aside the remedial action relating to the Public Protector’s direction to Parliament to amend this section of the Constitution. The Public Protector initially opposed this application, but then conceded the merits and consented to all the relief sought.

 The judgment states that -

 “She has agreed that her remedial action is unlawful in that only Parliament has the power to amend the Constitution and that she has no power to dictate to Parliament.”³

 “… the Public Protector’s explanation and begrudging concession of unconstitutionality offer no defence to the charges of illegality, irrationality and procedural unfairness. It is disconcerting that she seems impervious to the criticism, or otherwise disinclined to address it.”⁴

 The other remedial action in the Public Protector’s report related to her instruction to the Special Investigating Unit (“SIU”) to “recover misappropriated public funds unlawfully given to ABSA Bank in the amount of R1.125 billion” and that the SARB must assist the SIU to recover these funds. Legal review proceedings were instituted by the SARB, the Minister of Finance, the National Treasury and ABSA in order to set aside this remedial action. In the Court’s judgment,⁵ it was pointed out that the Public Protector had predetermined any investigation by the SIU in her report’s findings, and that they cannot therefore be regarded as recommendations. The Court found that she was also wrong in her answering affidavit before the Court, in claiming that the remedial action only advises the State of available remedies in law.

 In addition, the Court referred to the fact that she had held two meetings with the Presidency after the release of the preliminary report, but failed to mention the second meeting in her final report and to disclose what was discussed. She also met with the State Security Agency (SSA) and the former Minister of State Security, in discussions relating to the Reserve Bank. She failed to record these meetings and could not supply transcripts or minutes of these meetings. She did not engage with either ABSA or the Reserve Bank after these meetings.

In her answering affidavit, she stated that her comments on economics were made on the basis of economic experts during the investigation of the complaint. However, the Court pointed out that a report by Dr Mokoka (a senior lecturer in Economics at Wits) which she relied on, was obtained only after her final report had been issued. It therefore appears from the list of names of persons with whom meetings were held that the only persons outside of official and banking circles she had consulted, were Mr Stephen Mitford Goodson and Black First Land First. A cursory Google search provides much information on Mr Goodson, including the following:

 “Goodson … holds contentious views that include admiring the economic policies pursued by Hitler in Nazi Germany, a belief that international bankers financed and manipulated the war against Hitler because they saw his model of state capitalism as a threat to their usurious ways, and that the Holocaust was a fiction invented to extract vast amounts of compensation from the defeated Germans. He has argued that similar reasons underpinned the support of the United Nations for the uprising in Libya. Muammar Gaddafi’s usury-free banking system was a threat to global capitalism and had to be destroyed, according to Goodson.”⁶

Mr Goodson is also the author of a book which appeared in 2016, entitled “Hendrik Frensch Verwoerd - South Africa’s Greatest Prime Minister”. (sic)

 The Public Protector’s choice of interlocutors speaks for itself.

 The judgment comments that -

 “The Public Protector did not conduct herself in a manner which should be expected from a person occupying the office of the Public Protector ….. She did not have regard thereto that her office requires her to be objective, honest and to deal with matters according to the law and that a higher standard is expected from her. She failed to explain her actions adequately.”

 “... we have found that the Public Protector was biased and the remedial action should be set aside”.

 In its discussion on the costs order to be made, the Court stated that -

 “In the matter before us it transpired that the Public Protector does not fully understand her constitutional duty to be impartial and to perform her functions without fear, favour or prejudice. ….. Section 5(3) of the Public Protector Act provides for an indemnification with regard to conduct performed ‘in good faith’. The Public Protector had demonstrated that she exceeded the bounds of this indemnification.”

All the remedial action prescribed by the Public Protector in this matter was declared unlawful by the Court in two judgements. As far as the costs were concerned, the Court ordered her to pay 15% of the costs of the SARB in her personal capacity.

 After the High Court dismissed her application for leave to appeal, the Public Protector approached the Constitutional Court directly, for an order setting aside the personal costs order and that portion of the judgment on which that costs order was based, in particular: that there was a reasonable apprehension that the Public Protector was biased and that she does not fully understand her constitutional duty to be impartial and to perform her functions without fear, favour or prejudice.

 The SARB has taken the opportunity to lodge a cross-appeal against that part of the High Court’s judgment that refused to declare that the Public Protector abused her office during the investigation that led to the report.

 Importance of outstanding Constitutional Court judgment

The Constitutional Court hearing on these appeals took place on 27 November 2018. There has as yet been no indication by the Constitutional Court as to when judgment will be delivered and we have no information on why it is taking so long. In this context, reference can be made to the document entitled “Norms and Standards for the Performance of Judicial Functions”,⁷ issued by Chief Justice Mogoeng Mogoeng on 28 February 2014, where it is stated that “Save in exceptional cases where it is not possible to do so, every effort shall be made to hand down judgments no later than 3 months after the last hearing.”

 There are several aspects of the ABSA/Bankorp case which are particularly relevant to what is going on at the moment, especially relating to the Public Protector’s perceived bias, apparent lack of understanding of her constitutional duties and whether she abused her office in the investigation. It is assumed that a judgment by the Constitutional Court will clarify some of these matters and would give lower courts the necessary guidance in dealing with them.

 A judgment by the Constitutional Court on the personal liability for costs is also becoming increasingly important, since guidance is required by the Courts when they are confronted with similar situations. In another recent case,⁸ the High Court found the Public Protector’s report on the Vrede Dairy Project by the Free State’s Department of Agriculture to be unlawful, unconstitutional and invalid. The Court found that the Public Protector’s failure to investigate the complaints properly was plainly irrational, with the information before her providing at least prima facie evidence of corrupt activity. In addition, the Court found that her belief that she was not empowered to take remedial action by referring the matter to another organ of state for further investigation constituted a profound mistake of law.

 However, in response to the applicants’ request for an order that the Public Protector is to pay the legal costs in her personal capacity, the Court decided to postpone a finding on that subject until the Constitutional Court had handed down its judgment in the ABSA/Bankorp matter. It can be expected that applicants seeking to review the Public Protector’s findings will increasingly ask the Courts for such costs orders and much therefore depends on the Constitutional Court’s finding on this subject.

Anton van Dalsen

Legal Counsellor

anton@hsf.org.za

 1 Report No. 8 of 2017/2018, Public Protector, Report on an Investigation into allegations of maladministration, corruption, misappropriation of public funds and failure by the SA Government to implement the CIEX Report and to recover public funds from ABSA Bank.